Introductory Debate

THE GREEN rates must be slowed down. The resource owners must be prompted to temporarily leave more carbon underground. HANS-WERNER SINN Professor of Economics and Public Finance, Those convinced that with the brave new technolo- University of Munich; gies proudly displayed in many newspapers’ spe- President of the Ifo Institute for Economic Research cial sections we can avert should specify how they would move resource owners to Environmental policy must be turned on its head: extract less . And that is precisely the instead of mulling over for the thousandth time about sticking point. Politics so far exhibits not the slight- which technical measures can be applied to reduce est glimmer of thinking in this direction. From the carbon dioxide emissions, we should turn to the core Environmental Agency through the Greens to the question of how to induce the resource owners to relevant European Commission there is not a thing leave more carbon underground, as that is the sole on the matter. Even science itself overlooks the possible way to solve the climate problem. issue. Energy models depicting the long-term extraction path of fossil fuel resources do not con- The simple but usually overlooked fact is: other than cern themselves with the climate. Climate-theoret- the useful but limited afforestation efforts, there are ical models, in turn, do not concern themselves only two ways to curb the accumulation of carbon with the extraction of such resources; they are in dioxide in the atmosphere and, with it, slow down fact atemporal models that, by their very nature, global warming. We either temporarily refrain from are not in a position to analyse decision issues that extracting carbon from the ground, or we stuff it have an intertemporal dimension. Only now, back into the ground after having extracted its ener- thanks to the influence of the current German gy. All the technical endeavours to develop alterna- debate, a bit of movement is becoming apparent in tive technologies and all economic incentive systems the model front. to curb the must subordinate themselves to this fundamental fact. This silence goes hand in hand with the acknowl- edged difficulty of being able to do something in Bringing carbon dioxide back underground is easier this regard at all. What we in Europe and Germany said than done. One third of the primary energy in have set in motion with untold billions invested is the original fuel will be consumed by scrubbing CO2 geared at gradually reducing demand for fossil fuels from the exhaust and subsequently compressing it by developing alternative energy sources and strate- into a liquid. On top of that, the amount of storage gies. The range of initiatives goes from biofuels volume required is gargantuan, as each carbon atom through wind power to better insulating homes and has been joined by two oxygen atoms upon combus- capping vehicles’ CO2 emissions. The measures to tion – and they all need to be stored.Thus, in the case reduce consumption exert an increasingly stronger of anthracite coal more than five times as much vol- downward pressure upon the world’s fossil fuel mar- ume is required as the original fuel occupied under- ket price and dampen the rate of increase in such ground, while in the case of crude oil the proportion prices. is more than three-fold. According to estimates by the IPCC (Intergovernmental Panel on Climate Resource owners regard this development with con- Change), the Earth’s depleted coal mines and oil and cern. They rightly fear the erosion of the rate of cap- gas deposits will offer room for only some 600 giga- ital gains on the resources still in situ, moving them tons of carbon, barely one tenth of the recoverable to react by bringing forward their extraction plans carbon resources (6,500 gigatons). For that reason, if and converting a larger portion of their wealth into we are to curb climate change, carbon extraction cash and securing it as financial capital. They thus

CESifo Forum 3/2009 10 Introductory Debate increase their fossil fuel supply when demand for the detriment of generations far in the future finds them decreases. This is the green paradox: environ- neither economic nor ethical justification. What we mental policies that turn increasingly greener over need is a measured green policy that slows down time operate like announced expropriations. They resource extraction and, with it, global warming, but prompt resource owners to try to escape this by the green paradox shows that this goal cannot be accelerating extraction of their fossil fuels, which in achieved with the policies currently in place in turn speeds up the warming of the planet. Europe. The question is then, what brings us truly closer to the goal? Small wonder then that the massive efforts of Europeans have delayed the peaking of the world’s If a steadily greener policy accelerates resource carbon dioxide emissions curve to the future. In fact, extraction, it may be worth thinking about a green they have not been able to cause even the tiniest dip policy that turns to pale green as time goes by. Such in this curve. a policy would exert much higher pressure on prices at the beginning but let up gradually over time, with By saving ever more energy we are raising fears of the effect that world market prices would drop the future among resource owners and leading them quickly to a fairly low level only to rise afterwards at to increase the extraction rate. This has been music a steadily increasing rate. Climate change would be in the ears of Americans, Chinese and all other envi- slowed down, as intended. ronmental sinners. They have enjoyed the resulting lower energy prices and raised their consumption by But that is unfortunately only a theoretical solution even more than we have reduced ours. that is well nigh impossible to attain, as a steadily less green policy would have difficulty gaining credibility Some observers pin their hopes on a different effect: among the resource owners. The many proposals that the green policies push the price of fossil fuels in concerning the long-term goals of climate policy the world market so far down that they fall below the made by politicians all go in the opposite direction. extraction costs, making extraction unprofitable. Energy consumption is to be reduced a little at the Demand would then drop, as green policies intend. beginning but with increasing zeal as time progress- This hope is baseless, however, because, like old es. From the G8 Summit at Toyako in July 2008, in Rembrandts, resource prices are not driven by cost which the participating countries committed to a but by scarcity, and these hover always far above the 50 percent reduction goal up to 2050, to the ludicrous extraction costs. That is even now the case, in the proclamations of the German Left Party, who want midst of the dramatic fall in prices triggered by the to reduce emissions by 90 percent by 2050, policies current economic crisis. With oil prices slightly below follow the same pattern. The largest reduction 60 dollars per barrel, the extraction costs including efforts are to be made in the far future, while the cur- exploration in the Gulf (but not mining rights, which rent generations are largely spared. Politicians can- are part of the profit) amount to around one to one- not do otherwise, alas, as they do not want to inflict and-a-half dollars, and even the extraction of the the pain of immediate reductions upon their voters. Canadian tar sands costs, including exploration, no The year 2050 is so far in the future that the boldest more than 15 dollars. In due course, fossil fuel prices policy proposals can be made now without scaring will steadily increase as the resources become voters off. After all, the onus will fall later on other scarcer. At the same time, extraction will progress in citizens and other politicians who will have to tight- the direction of increasing extraction costs, as en their belts. The consequence of this delaying poli- resource owners save interest costs by beginning with cy is that the resource owners will move forward the the sites that are more easily accessible. Presumably, extraction of their resources. The quantities that the however, there will never be a point when extraction politicians announce for future restriction spring costs overtake product prices – or even come near from the ground all the more copiously today. them. An environmental policy based upon pushing prices below production costs would need a big ham- An environmental policy subjected to the con- mer. Marginal measures as those currently in force straints of democratic discussion and that limits itself are plainly insufficient for that purpose. to influencing the demand for fossil fuels cannot per- suade resource owners that the price of their prod- This is just as well so, as the argument for perma- ucts will be less affected in the far future than now or nently sealing off part of the resources still in situ to in the near future. On the contrary, the resource

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owners will be plagued by the fear that, as the plan- such a Super-Kyoto system, given that it has been et becomes warmer and the resulting climate dam- working intensively towards such a goal for several age more apparent, this policy will be tightened up years. But it will probably fail again, as the road to an even further. As a result, it can hardly be expected all-encompassing consumption cap is still far away. that a demand policy that attempts to influence sup- Thus far only the 27 EU nations, Canada, Australia, ply through price signals will ever make a contribu- Iceland, Japan, New Zealand, Norway, Russia and tion towards curbing climate change. Ukraine have accepted a cap on CO2 emissions. The rest of the world, including the United States, South A possibility to overcome this problem is to make it America, Africa and Asia from Turkey to China, unattractive for resource owners to convert their fos- responsible for 70 percent of CO2 emissions, have sil fuel wealth into financial investments. A global kept well clear of such a commitment. shift from the residence to the source-country prin- ciple in taxing interest income could achieve this The circumstances could change, however, if it goal. This would not alter the tax on interest income appears that the United States under the Obama for the residents of consumer nations but would levy Administration sets off on a new course. In any case, higher taxes on interest income for the resource the new Director of the White House’s National owners, giving rise to an incentive to leave more of Economic Council, Lawrence Summers, has an- the resource in situ, slowing down extraction and, nounced that the United States, after having over- with it, climate change. come the crisis, will introduce its own emissions trad- ing system in 2011. After this, the step towards a Another possibility is the formation of a seamless globe-spanning Super-Kyoto system should become consumer cartel in which all consumer countries easier. take part. Demand policies are ineffective if they only encompass some of the countries, as they will In principle a Super-Kyoto system would be similar then only operate through price signals and are like- to the rationing that was practised after the war in ly to cause the green paradox. The non-participating many European countries, when in order to buy food countries will then, at lower prices, not only gobble one needed ration coupons or stamps that were up the fossil fuel quantities that are set free thanks to issued by governmental agencies according to social the efforts of the Kyoto countries, but also the addi- criteria. To buy a pound of butter, a person had to tional quantities the resource suppliers bring to the pay the proprietor the regulated price of the product market out of fear of a deteriorating business envi- and at the same time give him a butter coupon. If ronment for their products. one did not have enough coupons, it was necessary to trade coupons with other coupon recipients. The The situation is different if all consumer countries mechanism would be very similar if trade in UN cer- accept a cap on consumption, as then the suppliers tificates were extended to all countries of the world. will find no takers for their products and will have to The total amount of carbon that is available to the reduce extraction whether they want it or not. Ex- countries could be rationed this way, and the distrib- pectations regarding the future will no longer play ution of the certificates via the UN trading system any role. With consumption caps valid for all con- and subordinate, regional trading systems, such as sumer nations the playing field will be tilted in a that of the EU, would determine where carbon is direction that does something for the climate. burnt.

These consumption caps could come about through The result would be attractive for the consumer a global certificate trading system, extending the one countries in two ways. Fossil carbon would not be introduced by the UN for a number of countries in extracted so quickly, which would slow down climate 2008. Granted, it would still be a market system that change. Secondly, the consumer countries would no allocates carbon volumes to the individual countries, longer have to pay so much for their fuel. To be sure, but now it would not be the resource owners who set the energy costs for individual consumers would be the extraction path, but the United Nations. The higher because they would also have to buy the cer- resource owners could not wriggle free of the power tificates, but the state treasury of every country of the UN. would have more revenue and citizens would benefit During the forthcoming world climate summit in by the additional provision of public goods or from Copenhagen later this year the EU will try to create lower taxes.The consumer countries as a whole, both

CESifo Forum 3/2009 12 Introductory Debate citizens and the state treasury, would pay less for fos- without limitations from the UN. Bearing these con- sil resources because they would reduce their siderations in mind, Dubai’s breathtaking economic demand, thus driving down world market prices. development can surely be understood as a rational counter-strategy of a significant resource supply From an economic viewpoint this Super-Kyoto sys- country. tem basically amounts to a partial expropriation of the resource owners and a partial substitute of the However, these avoidance manoeuvres will in turn market mechanism by a centrally planned control of induce the demand countries to develop their own quantities. Since one is only allowed to use the counter strategies. The countries participating in the resources if one can produce the UN rationing cartel will not allow individual countries to acquire coupons, the UN will become, in economic terms fossil carbon without the proof of certificates, and albeit not legally, the joint owner of the fossil fuel. If they will build up trade barriers to punish those who it gives the national governments the right to sell deviate. All this will create a considerable conflict these rationing coupons, as will be the case at least potential that could lead to outbreaks of military within the EU for the third trading period as of 2013, force. then it will of course transfer its ownership rights to the national governments. The revenue that these Only the horror of a further warming of the atmos- governments achieve from the sale of the certificates phere combined with the fact that the consumer comes at the expense of the resource owning coun- countries will have to keep on spending considerable tries and would lower the market value of the stocks parts of their real income for the acquisition of con- in situ. stantly dwindling amounts of carbon makes the worldwide demand cartel that the UN is planning Whether we should set out along this path, in light of attractive. Policy-makers have the choice between the negative experience we have had with centrally Scylla and Charybdis. planned strategies, is a highly complex issue that is difficult to decide. In the final analysis we will prob- If we wish to pursue the path to a Super-Kyoto sys- ably have no choice but to let the UN take over the tem, it is important that we do it quickly. Any delay central planning. is poison for the climate, not only because in the meantime emissions will continue unabated but This will certainly produce various negative behav- especially because a piecemeal inclusion of more ioural effects, as we know from central planning sys- and more countries would have the ironic effect of tems. A power centre will grow up around the UN stoking the green paradox even further. If the num- that will try to extricate itself from democratic con- ber of countries accepting caps on their emissions trols. The countries will begin to struggle with each increases only bit by bit, this will give rise to an increasingly larger price pressure over time that will other over who is to be favoured in the allotment of induce the resource owners to anticipate the wors- the certificates and will seek to obtain exceptions ening of their profit margins by speeding up extrac- from the necessity to purchase certificates. This in tion. Paradoxically, the more successful the world cli- turn will further strengthen the power of the UN mate summit is in gaining members to the worldwide bureaucracy. Possibly a worldwide black market for demand cartel over the coming decades, the more carbon will arise with a Mafia-style counter force rapidly will the world’s climate warm up in the initial arising that escapes democratic controls. stages. Only taking the resource owners by surprise, with an immediate completion of the cartel that pro- The resource countries will do all they can to resist ceeds so rapidly that the resource owners no longer such a solution.They will try to prevent the UN from have the time to react by accelerating the extraction forming a worldwide demand cartel, and by granting of their resources, can bring about the desired special deliveries of carbon fuel they will try to keep effects. as many countries as possible out of the cartel. They will also try to form a counter cartel.The fact that the OPEC is flirting with the idea of admitting Russia is not surprising in light of these developments. Moreover, the countries with the resources will attempt to develop their own economies such that they will be able to exploit their own fossil fuels

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